Haas Newsroom

9 October 2002

U.S. economy may be headed for another major recession, says new UC Berkeley study

Berkeley -- The national economy is more likely headed for another
serious recession rather than a continued slow recovery, according to
new report from the University of California, Berkeley's Haas School of
Business.

Kenneth Rosen, chair of the Fisher Center for Real Estate and Urban
Economics at the Haas School, and co-author Amanda Bishop, research
associate at the Fisher Center, say the current economic environment has
several characteristics of previous recessions.

"Although some forecasters anticipate a continued recovery, we believe
there is a substantial chance that we may enter a full-blown recession
in late 2002 and 2003," they say in their report that calculates those
odds at 60 percent.

In "Another Leg Down? Risk Factors that Could Push the Economy Back into
a Full Blown Recession," they note the economy may be affected by a
number of other risk factors such as a volatile stock market, badly
bruised technology and telecom sectors, and corporate accounting
scandals and corporate fraud.

Rosen, who holds the California State Chair of Real Estate and Urban
Economics at the Haas School, is known in the business community for his
annual real estate and economic forecasts.

He and Bishop say they base their findings on current economic trends
that cause consumers to reduce their spending. Those include the stock
market correction; corporate America's second-round layoffs; the
depressed technology and telecom sectors; high private sector debt; a
potential corporate credit crunch; geopolitical events such as fear of
terrorism and a potential United States-Iraqi war; a high foreign trade
deficit; and a continuing capital spending slump.

Some of these factors, such as high private sector debt and a credit
crunch, have been present in previous major recessions.

At the same time, Rosen and Bishop say a few forces are stimulating the
economy. The most notable, they say, is the extremely low interest rates
that have spurring huge demand for homes, home improvements and new car
purchases. Other forces helping to buoy the economy and keep it from
slipping into a deep recession include a surge in defense spending and
year-over-year increased industrial production.

In their January 2001 report, "Recession Risk Rising," Rosen and
co-author Amanda Howard accurately forecasted an impending recession,
based on an overheated stock market and some of the same trends they say
are affecting the economy this fall.

"These factors put the economy at a 60 percent risk of reentering a
full-blown recession like ones experienced in the 1970s, 1980s and early
1990s," predicts Rosen. "However, if the consumer keeps spending, it is
possible that a slow recovery will continue. The odds of a slow recovery
continuing are 40 percent."

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NOTE: To receive the full report in a PDF format, or to speak to the
authors, contact Ute Frey at the Haas School of Business at (510)
642-0342 or by e-mail at frey@haas.berkeley.edu.